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The European Commission has indicated that it is likely to extend the “equivalence” period for UK-based CCPs from early 2022.
This extension will be granted for long enough to allow EU policymakers to revise the EU’s existing supervisory system for CCPs and to build EU-based clearing capacity, taking into account the changes to stability risk in the clearing layer presented by the UK’s exit from the European Union.
Mairead McGuinness, EU commissioner for financial services, financial stability and capital markets union, says that proposed way forward will balance the need to protect financial stability in the short term — which requires extending the equivalence period to avoid a possible “cliff edge” for EU-based market participants — and the need to safeguard financial stability in the medium term.
At the heart of its plans to reduce threats to medium-term financial stability are steps to “reduce this risky over-reliance on a third country”.
From early in the Brexit debate, central counterparty clearing was flagged up as an area where disruption in the access of EU-based trading parties to UK-based CCPs could lead to stability risk.
Consequently, the Commission introduced a fixed-term equivalence period for UK-based CCPs, spanning from September 2020 until 30 June, to avoid a “cliff-edge scenario” — a hard stop that might result in “an abrupt interruption to clearing services”.
This extension is intended to give EU-based market participants time to migrate their euro-denominated trading contracts from UK-based CCPs to central clearing entities based in the EU.
This will also give the EU financial authorities more time to evaluate the stability risks posed by EU-based CCPs and to review their future clearing rules.
Several European agencies, including the European Commission, the European Central Bank, The European Supervisory Authorities and the European Systemic Risk Board, have formed a derivatives working group to evaluate the opportunities and challenges in transferring derivatives clearing from UK-based entities to the EU.
This working group has proposed a package of measures to improve the attractiveness of EU-based central clearing and to reform existing regulatory provisions, collectively designed to establish a strong and attractive central clearing capability in the EU in times ahead.
The Commission has found that the current equivalence timeframe, extending until June 2022, is too short to achieve these goals.
McGuinness indicated that she will also put forward measures in 2022 designed to meet the Commission’s concerns over financial stability in the medium term.
This will focus, first, on building domestic clearing capacity, making the EU more attractive as a competitive and cost-efficient clearing hub. The aim is to increase trade flow cleared through EU CCPs and to expand its range of clearing solutions.
Second, this will involve strengthening the EU’s framework for CCP supervision, including a strong role for EU-level supervision.
“Equivalence” is a mechanism under certain EU legislation where the EU (or the UK) can recognise elements of a third-country supervisory regime as being equivalent to the corresponding EU (or UK) legislation.
Two days ago, the Bank of England proposed a tiering scheme to assess the systemic risks posed by non-UK central counterparties operating in the UK.
